MainStreet Bancshares, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are to 2022. MainStreet is a Virginia bank holding company operating MainStreet Bank and serving Northern Virginia and the greater Washington, D.C. area. Its community-bank activities include commercial, real-estate and consumer lending, deposits, and a developing Banking-as-a-Service business, Avenu.
Financial performance and condition
- Scale and growth: Total assets were $2.035 billion, up 5.7%; net loans were $1.705 billion, up from $1.580 billion; deposits were $1.686 billion, up from $1.513 billion.
- Earnings: Net income was $26.6 million, down 0.3%; net income available to common shareholders was $24.4 million and diluted EPS was $3.25, versus $24.5 million and $3.26 in 2022. Return on average assets was 1.38% (1.53% in 2022) and return on average equity was 12.66% (13.98%).
- Interest income and margins: GAAP net interest income rose 8.5% to $75.9 million as loan balances and yields increased. Interest expense climbed 248% to $48.2 million, reflecting higher deposit and borrowing costs. Net interest margin was 4.08% on a fully tax-equivalent basis, down from 4.19%; the interest-rate spread fell to 2.95% from 3.66%.
- Other income and costs: Non-interest income declined 24.7% to $3.6 million, including no loan-swap fee income versus $619,000 in 2022. Non-interest expense increased 15.5% to $45.1 million, principally from higher staffing costs, FDIC insurance and franchise tax. The efficiency ratio rose to 56.69% from 52.19%.
- Cash flow: Operating activities provided $31.6 million; investing activities used $130.7 million, primarily reflecting loan growth; financing activities provided $83.0 million. Cash and cash equivalents ended the year at $114.5 million, down from $130.6 million.
- Credit quality: Nonperforming assets were $1.0 million, or 0.05% of assets, versus $21,000 in 2022. Net charge-offs were 0.03% of average loans. The loan-loss allowance was $16.5 million, or 0.96% of gross loans, compared with $14.1 million and 0.88% in 2022. Watch-list, special-mention and substandard loans increased during the year; management said it did not believe significant loss exposure existed in those loans.
- Capital, debt and liquidity: Stockholders’ equity was $221.5 million; tangible equity to tangible assets was 10.24%. The Bank reported CET1 of 16.22%, total risk-based capital of 17.18% and a leverage ratio of 14.66%, and was classified as well-capitalized. Year-end debt included $72.6 million of subordinated notes and $15.0 million of federal funds purchased; there were no FHLB advances outstanding. The Bank reported approximately $504.8 million of FHLB borrowing availability and $114 million of correspondent-bank availability.
Material changes versus 2022
- Loan growth and higher rates lifted interest income, but deposit costs rose sharply and outpaced income growth, compressing net interest margin.
- Deposit balances increased, while the mix shifted away from non-interest-bearing demand deposits toward money-market and time deposits. Non-interest-bearing deposits fell to $364.6 million at year-end from $550.7 million.
- Wholesale deposits, as described by the Company, increased to $433.0 million from $355.6 million. The filing also reports $574.8 million of regulatory-defined wholesale deposits, including reciprocal deposits counted for call-report purposes.
- The Company adopted CECL on January 1, 2023. The transition reduced retained earnings by $1.7 million, net of tax, and increased the loan allowance by $895,000 and the off-balance-sheet allowance by $1.31 million at adoption.
- Common dividends were $0.40 per share, compared with $0.25 in 2022. The Company reported $3.25 in book value per common share? Not applicable; reported book value was $25.81, versus $22.98 in 2022.
Outlook, commentary and risks
- Management said it believes the Company is positioned to continue profitable growth, with a focus on core deposits, lending and non-interest income. It provided no numerical earnings or balance-sheet guidance in the supplied filing text.
- Avenu generated $51,000 of pre-tax income in 2023 and held an average $45.0 million in non-interest-bearing deposits. Management anticipated elevated expenses during development and ramp-up. The filing describes software expected to enter service in the first quarter of 2024 and Avenu’s platform deployment in 2024, with another section indicating a second-quarter 2024 deployment.
- Commercial real estate is a significant concentration: construction and land-development loans were 137.7% of consolidated risk-based capital; CRE under agency guidance was 372.5%, and the CRE portfolio grew 55% over 36 months. The Company described heightened underwriting, stress testing and internal concentration limits. Its stress tests estimated $31.8 million of aggregate losses across the specified earning-asset categories, with post-stress capital ratios remaining above stated targets.
- Other key risks include higher funding costs and deposit competition, dependence on wholesale funding, interest-rate and liquidity exposure, commercial property values and occupancy, borrower weakness, cyber and third-party service-provider risks, and regulatory changes. Certificates of deposit totaling $463.7 million were due within one year; deposits above the FDIC insurance limit totaled $387.8 million.
- Available-for-sale securities had $9.8 million of gross unrealized losses at year-end, attributed primarily to interest-rate movements rather than credit deterioration. The filing reports no securities sales in 2023.
- The financial statements received an unqualified audit opinion. Management assessed internal control over financial reporting as effective; the auditor did not provide an ICFR attestation, as permitted for the Company’s reporting status.
Important facts for investors to verify
- Track deposit mix, wholesale and uninsured deposit levels, upcoming time-deposit maturities, and the cost and availability of replacement funding.
- Monitor CRE concentrations and property-level performance—especially construction, office, hospitality and non-owner-occupied loans—and changes in watch-list, special-mention, substandard and nonperforming balances.
- Assess whether deposit repricing continues to outpace loan and securities yield changes, and review the Company’s disclosed interest-rate sensitivity assumptions.
- Follow Avenu’s actual launch timing, implementation spending, compliance controls, deposit contribution and fee generation; the filing gives differing Q1/Q2 timing references.
- Review CECL assumptions and allowance coverage, securities valuation and accumulated unrealized losses, and the effect of capital distributions and subordinated debt on common shareholders.